The 2nd pillar for cross-border commuters: everything you need to know
Switzerland's three-pillar pension system is designed to meet the essential needs of future retirees. The 2nd pillar - also for cross-border commuters - known as LPP, is an integral part of this pension system.
On average, each citizen between 25 and 65 years old has
CHF 12’838 in vested benefits!
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It is important to note that the 2nd pillar has various characteristics that vary according to certain circumstances, particularly if you change your country of residence.
The Swiss occupational benefits system
The Swiss pension system is based on three complementary pillars, designed to maintain an adequate standard of living in retirement:
- The 1st pillar is the state pension scheme, which aims to ensure a minimum income in retirement. This pillar is based on contributions paid by working people to meet the basic needs of retired people.
- The 2nd pillar (= LPP or vested benefits) supplements the first pillar. The contributions are deducted from the income generated by the professional activity and aim to maintain the standard of living prior to retirement.
- The 3rd pillar is an optional pension option. It is designed for contributors who wish to improve their pension of their own accord once they retire.
The special feature of the 2nd pillar is that it is funded by employee contributions made to the pension fund throughout the working life of both employer and employee.
What do these contributions cover?
Cross-border commuter 2nd pillar contributions cover four key elements:
1 - The savings portion
This is the amount that will be used to finance your retirement benefits. The contribution varies according to your age, your salary and your company's pension plan.
From age 25 to 65, contributions are calculated as a percentage of your coordinated salary and vary according to your age bracket:
- under 25: no obligation to contribute
- aged 25 to 34: 7% of coordinated salary
- from 35 to 44 years: 10%
- from age 45 to 54: 15%
- 55 to 65: 18%
Swiss law stipulates that employers must contribute at least as much as their employees (they may choose to contribute more). For example, if you are 50 years old (i.e. 15% contributions), you and your employer will each contribute 7.5% of your coordinated salary.
To determine the annual amount of your pension, the law sets a conversion rate (in reality, there are two conversion rates: one for the compulsory part and another for the extra-compulsory part). In 2021, the conversion rate for the compulsory part is 6.8%. For the supplementary portion, the rate is less than 5% and is set by the pension fund's Board of Trustees.
2 - Retirement benefits
As part of the retirement benefits, you receive the funds from the 2nd pillar in the form of an annuity or a lump sum.
3 - The risk portion
This is the part that finances disability benefits (paid to people who are at least 40% disabled) and death benefits (paid to the surviving spouse or heirs of the insured person).
4 - Contributions to the guarantee fund
These contributions are used to cover retirement pensions in the event of the insolvency of your employer or pension fund.
Finally, you also contribute to cover the management costs of the pension fund.
Minimum salary for 2nd pillar contributions
Any worker earning a gross annual salary in excess of CHF 22,050 (in 2023) must contribute to the 2nd pillar.
What can be done with the cross-border worker's 2nd pillar?
You can "buy back" pension funds to boost your retirement capital.
Tax benefits of buying into the 2nd pillar
Swiss pension legislation provides for tax deductions for purchases made under the 2nd pillar. To take advantage of these tax benefits, we recommend that you contact the pension fund concerned to find out what supporting documents are required and the specific procedures to be followed.
If an employee has not contributed to the occupational pension scheme for several years, they can choose to buy back (or catch up) their past contributions, either in anticipation of early retirement or to improve their planned retirement benefits.
Buying into the 2nd pillar involves paying a set amount into the pension fund concerned. Here are the steps to follow to make such a purchase:
- Contact the pension fund where the 2nd pillar was taken out.
- Complete the forms provided by the pension fund, together with the payment slip.
- Send in the required documents and make the payment.
Once the pension fund has confirmed the purchase, keep the documentation in a safe place. Depending on the rules of your pension fund, it may be possible to make one or more purchases during the year.
By opting to buy BVG contributions, the pension you receive on retirement can be considerably increased. Supplementary benefits such as death and disability pensions can also be improved.
However, it is important to note that buying into the 2nd pillar may not always be advantageous in Switzerland. The amounts purchased are blocked for three years, during which time the 2nd pillar capital cannot be withdrawn. To avoid any inconvenience, it is advisable not to buy back years of contributions if the pension fund has a cover ratio of less than 100%. It is also advisable to ensure that the purchase is included in the compulsory part of your assets, to guarantee optimum profitability.
In the case of cross-border workers, the conditions for buying into the 2nd pillar are similar, with the exception of the tax deduction limit, which is set at a maximum of 12 quarters.
To maximise the benefits of buying into the 2nd pillar, whether you are a Swiss resident or a cross-border commuter, certain conditions must be met:
- If you are planning to withdraw pension funds to invest in property, make sure you repay any early withdrawals before making a purchase.
- Catch-up payments are particularly advantageous with solid pension funds (offering cover of 100% or more).
- Purchases are recommended for people with gaps in their pension or insurance cover, particularly cross-border commuters who have acquired this status because of their work abroad.
How do I withdraw my BVG?
The funds contributed to your LPP as a Swiss cross-border commuter must be used to finance your retirement benefits. In this case, they are paid to you in the form of an annuity, capital or both.
Withdrawing your 2nd pillar for a home purchase
You can withdraw funds from your 2nd pillar to :
- buy your principal residence
- pay off mortgages on your principal residence
- finance renovation work
However, releasing these funds will result in a significant reduction in your retirement pension when you retire.
Withdrawing your 2nd pillar to become self-employed
Setting up your own business is also one of the rare conditions for withdrawing your 2nd pillar. You will need to meet certain conditions to ensure that your business is your own.
Withdrawing your 2nd pillar to leave Switzerland
You can withdraw your funds to leave Switzerland permanently if you wish to move to a country outside the European Union (EU) or the European Free Trade Association (EFTA).
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Brevet fédéral de planificateur financier
Économiste d’entreprise HES
3rd Nov 2023